Live From Sohn: PointState Sees Falling Oil, Rising Refiners

By Dimitra DeFotis

PointState Capital’s Zach Schreiber thinks U.S. crude oil prices are headed lower, but he would match his idea to short crude oil with two advantaged U.S. refiners.

Associated Press

He likes Valero Energy (VLO) and Marathon Petroleum (MPC); shares were up slightly in late afternoon trading. These refiners are returning cash in the form of dividends and stock buybacks. “We think the upside is at least 60%,” said Schreiber.

The refiners’ costs are based on the U.S. crude oil price, but their prices are set based on international benchmarks. The spread between WTI and Brent crude, the international benchmark, as reflected in current stock prices, is too narrow.

The reason to like Valero Energy and Marathon Petroleum: free cash flow yields are attractive and strong balance sheets. And, each has a master limited partnership that it can put more assets into, a valuable structure for tax-saving that results and higher valuations for those assets “dropped” into the MLP. But this is “massively undervalued in the current stock prices,” he said.

“We believe crude oil is going lower. Much lower, and we want to be net short crude,” Schreiber says.

Quoting the title of a song from legendary rockers Led Zeppelin, he said “The Song Remains the Same” for U.S. oil prices: U.S. and Canadian oil production is growing very fast. Just because lots of new railroad and pipeline delivery is taking new sources of crude past Cushing Oklahoma, the hub, to other points on the coast, the case isn’t there for higher prices.

The supply has to be refined before it can be exported, and he argues Congress won’t change that restriction anytime soon. The U.S. could import less crude, but Gulf refineries are especially suited to “heavy” oil that is imported. Last option: discipline, meaning producers should bring less oil to market.

Clearly not everyone agrees – there is $33 billion net long WTI, he said.

Schreiber is a portfolio manager at PointState Capital, which he co-founded in 2011 with an investing team from Duquesne Capital Management, where he had managed a portfolio of energy, power, utilities and related commodities investments. Stan Druckenmiller, who founded Duquesne and shuttered his hedge fund in 2010, introduced Schreiber with high praise. Druckenmiller said he has half his money invested with PointState.

Shares of Marathon Petroleum have gained 0.5% to $96.24 at 3:18 p.m., while Valero Energy has risen 0.8% to $58.37. WTI crude oil has dropped 0.3% to $99.47 a barrel.

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